TORONTO - Canada's government is unlikely to buy shares in the country's domestic banks because they are in much better shape than their American and European counterparts, which have required massive assistance from their governments, market observers say.
National Bank analyst Robert Sedran said Tuesday that Canadian banks have emerged relatively unscathed by the U.S. subprime problems because of more conservative lending practices.
"The banks in Canada have strong balance sheets and are doing fine," he said Tuesday in a phone interview.
However, Sedran said there is a need to ensure that Canadian banks aren't put at a disadvantage by other countries injecting capital into their local institutions, such as the $250-billion share purchase plan unveiled by George W. Bush.
On Tuesday, Bush said the U.S. government would buy shares in the big American banks as part of the $700-billion bailout package designed to jolt the economy back into growth.
The decision raised some concern that capital would flow towards government-backed banks because they appear more secure, and possibly away from institutions that don't have that guarantee.
Sedran said government-backed risk has an appeal over corporate risk and could ultimately steal some confidence from the Canadian banking system.
"Capital is mobile in this global market," Sedran said. "You need to protect the Canadian banks from a competitive positioning perspective so that they're not unnecessarily disadvantaged."
However Laurence Booth, a professor at the Rotman School of Management, says Canadian banks are already better capitalized than the American and British banks.
And the federal government in Ottawa has made efforts to aid Canada's financial system without fully putting its hands into their operations.
On Friday, the Canadian government announced it will buy up to C$25 billion in residential mortgages to give the chartered banks more cash for loans. The first round of purchases is scheduled to be $5 billion on Thursday, two days after the federal election.
Finance Minister Jim Flaherty also said last week that the government is prepared to do "whatever we have to do" to protect Canada's financial system, though he declined to outline any plans.
However, some observers say Flaherty has only provided a vague outline of a plan, compared to other countries that have provided significant disclosure.
"Everyone else had all these details, specific plans -- even numbers -- and all we got from the Canadian side was that we'd make sure our banks aren't disadvantaged," said Chris Blumas, an analyst at Morningstar.
Prime Minister Stephen Harper has defended the way that the Conservative government handled the economic crisis and their insistence that the domestic economy is relatively stable compared to the United States.
"The No. 1 job of the next prime minister of Canada is to protect this country's economy -- our earnings, savings, and jobs, at a time of global economic uncertainty," he told supporters on Monday at a rally in P.E.I.
Liberal party leader Stephane Dion has announced a 30-day plan to address the Canadian economy, and boost the struggling manufacturing sector in Ontario.
NDP Leader Jack Layton has suggested that Canadian banking regulations undergo a comprehensive review.
